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These IPOs are now a Screaming Bargain

Even with the real-estate market mired in a slump, investors
still clamored forshares of
Zillow (NYSE:
Z
)
. On July 20, the real estate-focused website went public at an
initial offering price of $20, opened in the low $30s and briefly
spiked to $60 that same day, as more than five million
shares
traded hands. Two days later, the stock market began its most
brutal sell-off in three years. Shares of Zillow have been losing
steam ever since, now trading for less than half of that intra-day
peak.

Initial public offerings (IPOs) have it especially hard at times
like this. They often carry a thin stock
float
, which can propel shares quickly higher but can also lead to heavy
selling pressure when sellers take root. In the case of IPOs
such as Zillow, investors are unlikely to find support from
underlying fundamentals. For instance, Zillow had only $30 million
in sales in 2010, yet at its peak, the stock was valued at more
than $1.5 billion, or 50 times trailing sales. Yikes!

But there are many lagging IPOs with a more solid foundation
underneath them. When the market finds its footing (and it always
does), investors are likely to revisit these stocks. Here are three
recent broken IPOs trading below their initial offering price that
are set to rebound as soon as the market stabilizes.
1. Freescale Semiconductor (NYSE:
FSL
)
This chip maker, which was once the semiconductor arm of
Motorola (NYSE:
MSI
)(NYSE:
MMI
)
(which has since split itself into two separate companies), should
be very grateful to have pulled off an $18
IPO
in late May. This allowed the debt-laden firm to bolster its cash
to a more comfortable level. Sure, debt still stands at a too-large
$5.6 billion, but investors need not worry about any major bonds
coming due in the next few years (other debt was recently
refinanced, which extended the maturities on existing borrowings).
Assuming the globaleconomy doesn't fall off a cliff, this
balance-sheet rejiggering should give the company breathing room to
generate
cash flow
and improve its
debt ratio
.

In the interim, investors should focus on the equity: The $18 IPO
is now a $10 broken IPO, valuing the whole company at just $2.2
billion (a far cry from the $17.6 billion for which private equity
firms acquired Freescale in 2006). Freescale sold $4.6 billion
worth of embedded chips in 2010, meaning the stock now trades for
less than half of sales -- the lowest ratio of any major chip maker
by far. The embedded chips go into a range of applications such as
automotive electronics, wireless transmission devices and consumer
appliances.

Freescale's backers waited until a series of heavy investments in
new products began to pay off. This appears to be the case now.
Gross margins have risen for nine straight quarters (and after
rising 450 basis points in the last year, they have reached 45.6%).
Second-quarter sales grew 10% year-over-year and, coupled with the
gross-margin gains, pushed
operating income
to $216 million in the second quarter, from $136 million in 2010
(though generally accepted
accounting
principles obscured much of the headway).

Freescale, after the sell-off, now trades for about $12.30, which
is less than two times trailing
earnings
before interest, taxes,
depreciation
and
amortization
(
EBITDA
) of $1.3 billion. This multiple can sharply expand when the
company's
debt load
starts to gradually lighten in coming quarters and investors gain
confidence that the recent quarterly results can be sustained. This
stock may struggle further in 2011, but could do very well in the
next few years.

2. Boingo Wireless (Nasdaq:
WIFI
)
A limited history as a
public company
, coupled with a location in the land of high technology, is simply
a painful place to be right now. Shares of this provider of public
Wi-Fi services are getting hammered right now.

Back in mid-June, I suggested
shares could get a pop
from fresh analyst coverage At the time, I was keen to see
whether management could deliver on their promise of focusing on
profits and not simply growth, for its own sake. Sure enough,
second-quarter results showed $6.4 million in EBITDA and $1.4
million in net profits. Each of these metrics could improve in the
third quarter, according to management. On a full-year basis, sales
are now on track to rise more than 15% to about $93 million.

These numbers aren't enough to protect the stock, which plunged 20%
on Monday, Aug. 8, on no apparent news, only to rebound by nearly
7% on Tuesday, Aug. 8. As I noted earlier, new IPOs are especially
vulnerable in market routs. But, if there is a silver lining, then
Boingo at least now sports $82 million ($2.50 a share) in net cash,
which will come in quite handy as the company looks to expand in
these economically-challenged times.

3. Air Lease (NYSE:
AL
)
Even when a respected veteran is at the helm of an IPO, shares can
suffer from a lack of respect. Steven Udvar-Hazy, who pioneered the
concept of buying planes from manufacturers and leasing them to air
carriers in the early 1970s, is not getting any respect right now.
He subsequently sold his first business to
AIG (NYSE:
AIG
)
(now known as International Lease Finance) at a considerableprofit
. This year, he garnered a great deal of attention when he
announced plans to take his new company, Air Lease, public. He made
his investors rich once, so they hoped he could do it again.

He's off to a rough start. The April 2011 IPO, priced at $26.50,
bounced up toward the $30 mark this summer, but has recently
tumbled all the way to $21.

Air Lease holds its quarterly conferencecall Thursday, Aug. 11. In
all likelihood, the quarterly results might be far more solid than
the lagging share price may imply. Of course, the weak stock may
also be a reflection of more trouble ahead for the airline
industry, but this firm owns a fleet of almost-new fuel-efficient
planes and holds great appeal to airline carriers that need to
unload their older inefficient planes and upgrade to new ones that
consume less jet fuel.

Action to Take -->
These IPOs are getting sucked down into the market vortex,
but they will most likely see better days in coming quarters.
Value investors should be quick and act before everyone else
notices the appeal of these currently undervalued shares and sends
prices back up.

-- David Sterman

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Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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